Posted by: Chris Palmeri on April 28, 2009

This video came to use courtesy of two Kiwis, Hugh Pavletich, an urban planner in New Zealand, and Mike “Mish” Shedlock, a financial advisor. It shows brand new homes in California being torn down by the bank that foreclosed on them.

This video from California illustrates how “extreme” the situation has got - as the massive housing bubbles are deflating. In this case – the residential developers have failed – leaving the (un named) Bank with the subdivision and the few houses.

These new houses are being torn down. The video suggests that the regulatory code violation costs are excessive – and it is therefore more cost effective to demolish the new houses and have a subdivision of clear lots available for sale. However – it is likely there is more to the story than this………………….

It would appear the new houses being demolished are rather large and totally unsuited to prospective low income buyers – and that a clear subdivision is likely more saleable to prospective developer / builders of more affordable housing. The subdivision appears to be in the middle of a desert.

What is therefore being torn down, could be described as “bubble housing” – where - as the California bubbles were inflating, existing home owners were using their “bubble equity” to leverage their way in to this larger more expensive housing. A false and obviously extremely risky market situation.

As the California housing bubbles have collapsed to half their bubble peak prices – this “bubble equity market” has now evaporated. In a normal market – this bubble housing would never have been built. There is likely to be considerable volumes of “bubble housing” in the United States and elsewhere where artificial regulatory housing bubbles have been created. Much of it is likely virtually unsalable.

This “bubble stock” should not be confused with normal surplus new housing stock of affordable markets where housing did not exceed three times annual household income (e.g. Dallas Fort Worth, Atlanta, Houston). California with its population of 37 million and residential stock of approximately 13 million units (with the United Kingdom) – currently has the worst build rate per thousand population in the English speaking world of around 1 unit / 1000 population per annum. Normal replacement requires about 2 to 3 units / 1000 population.

The California housing bubbles triggered the Global Financial Crisis.

About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.